Home Builders Need Mortgage Bankers to Keep Recovery Alive

A jump in signed contracts to buy newly built homes in September brought volumes to the highest level since April of 2010, when the home buyer tax credit temporarily infused the housing market.

The median price of a newly built home also rose nearly 12 percent from a year ago, as builders gained pricing power thanks to lessening competition from distressed properties.

Is it enough to put a period on the statement that housing is in full recovery? Perhaps, but not an exclamation point.

There is still too much uncertainty in the mortgage market to proclaim that housing is on its way back to its "frothy" days. That was abundantly clear at the Mortgage Bankers Association's annual convention in Chicago this week, where the murmurs among the masses were all about regulation in the industry.

"I think that there is a concern that we may get tighter before we realize the balance," said Debra Still, chairman of the MBA and CEO of Pulte Mortgage. "We certainly have to balance consumer protection with access to credit and there's a fine balance that we have to figure out. Lenders will probably err on the side of being conservative before they will find that balance and lend to the fullest."

Uncertainty over impending new regulations in the mortgage market has mortgage bankers understandably nervous. These new rules will determine risk held by lenders as well as down payments required for borrower, among other things. That uncertainty is having a direct effect on mortgage rates.

Despite the Federal Reserve's $40 billion weekly infusion into agency mortgage backed securities, mortgage rates are just barely below where they were before the announcement of so-called QE3. Rates did fall immediately after the announcement, but with the 30-year fixed bouncing back up to 3.63 percent from mortgage applications fell dramatically, down 12 percent overall. Refinances fell the hardest last week, down 13 percent, but applications to purchase a home weren't far behind, down just over 8 percent week-to-week.

"Wow, that was quick. Ahead of today's 2nd day of the FOMC meeting, the MBA said both applications for refi's and purchases are now below the levels of mid Sept when the Fed decided to further help the housing market with more QE," writes analyst Peter Boockvar of Miller Tabak. "The costs of an eventual Fed exit will far outweigh any benefits."

Why are mortgage rates rising again? Because even though the ten-year Treasury yield, which mortgage rates generally track, is above where it was before the Fed's announcement of QE2, the greater demand by the Fed for MBS is being met by plenty of supply in the form of big refinance volume. The banks are not passing through the discounts they are getting to consumers due to tighter lending standards and rising fees.

Tighter credit is particularly hard on first-time home buyers, who might not have strong credit scores or large down payments; this cohort usually makes up 45 percent of the overall home buying market but today are down at just 32 percent according to the National Association of Realtors.

"It's that first time home buyer we have to be mindful of and make sure that the rules and the credit parameters don't restrict the buyer that doesn't have equity available in a prior home to move up or the assets in the bank yet," adds Still.

As we head into the historically slower months for the housing market, mortgage rates will likely play an outsized role, as today's buyers are far more sensitive to the slightest rate moves. True, sales for the builders are up 42 percent from the trough at the beginning of 2011, but 72 percent below the latest peak, according to Boockvar. The door is open for the builders, as long as the bankers don't slam it shut.